On Oct. 11, Microsoft and its partners plan to announce the initial wave of handsets that will use Windows Phone 7, a thoroughly overhauled version of the company's cellphone operating system. Mr. Ballmer believes the software will compete more effectively against Apple Inc.'s iPhone and Google Inc.'s Android operating system.

Microsoft has gotten more aggressive against Android in other ways. The company filed a lawsuit Friday against Motorola Inc., alleging the handset maker is infringing Microsoft patents in its Android phones. Motorola vowed to fight the suit.

Microsoft hopes the new phones based on its software erase the memories of missteps like Kin, a Microsoft-designed phone (based on different software) that was pulled from the market earlier this year after only two months. Microsoft's board docked Mr. Ballmer's bonus for the last fiscal year in part because of those missteps, the company disclosed last week in a regulatory filing.

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A lot is riding on the new software. Mr. Ballmer is under pressure from investors to show Microsoft's bets in new high-growth markets like mobile can pay off. In an interview, conducted before Microsoft sued Motorola (and before Microsoft disclosed Mr. Ballmer's compensation for last year), he talked about how Microsoft plans to profit in the mobile market and the challenges of improving its share of the business. He also defended the traditional computer, and said he sees plenty of demand in the future for both for small- and larger-sized PC devices.

Excerpts:

WSJ: Your mobile business has gone through some pretty dramatic changes — new leadership, new software, a new way of working with handset partners. Why was that necessary?

Mr. Ballmer: In a sense, you could say we missed a cycle. We had some execution issues from an R&D perspective. In the time frame since the last significant release certainly the industry has moved, the technology has moved, the hardware has moved.

We said, we've got to move forward, not shoot for yesterday. We've got to shoot ahead in a way that's delightful to users, accessible to developers and prioritize everything else we do around those elements.

WSJ: You chose not to develop your own handset. Can you talk about why that is?

Mr. Ballmer: In some sense you could say we did some level of development. We put out to our partners that we were going to build on a certain minimal so-called hardware chassis. So you could say we did some design work, but we're certainly not selling phones.

WSJ: Did you ever seriously think about selling your own handset?

Mr. Ballmer: I think about a lot of things. We're working with HTC, Samsung, LG and a variety of partners.

WSJ: Are you trying to protect Windows or do you see Windows Phone 7 as a big revenue opportunity in and of itself?

Mr. Ballmer: No, I see it as a big opportunity. There's the sale of the device, there's potential for search revenue on top of that and commerce revenue. There's potential for subscription revenue from various entertainment or productivity experiences.

Job One here will be selling a lot of phones, and if we sell a lot of phones, good things are going to happen.

WSJ: You're still charging a license fee for the software.

Mr. Ballmer: Sure.

WSJ: Is that difficult in an environment where Android is free?

Mr. Ballmer: Android has a patent fee. It's not like Android's free. You do have to license patents. HTC's signed a license with us and you're going to see license fees clearly for Android as well as for Windows.

WSJ: It doesn't seem like the license fee alone is a big financial opportunity for Microsoft.

Mr. Ballmer: It's one of the opportunities. One.

WSJ: It's one of them.

Mr. Ballmer: Look, anything that can sell in the tens to hundreds of millions is a big opportunity, and we see big opportunity. Even in the world today, there's a bunch of different models in place.

The up-front gross margin per device is less on a BlackBerry, but then they choose to make more on the back end through subscription fees whether it's a consumer or business phone. There's a lot of ways Google chooses to make a little less on the front end and want to make a little bit more on the back end.

WSJ: If you look at the market share stats, the Apple guys have done well, the Android guys have really surged and you guys have lost share the past couple years. How hard is it to make that ground back up?

Mr. Ballmer: We'll see. The fact that things have been pretty dynamic means that they're probably still pretty dynamic.

WSJ: So you think things could change quickly in terms of market share?

Mr. Ballmer: I said they can. There's no doubt that things have changed quickly, and at least in my undergraduate degree in math, that's called an existence proof. We know it's possible, we'll see what happens.

WSJ: The software on Windows Phones looks more different from the other phones than any of the other products that are out there [with a homescreen featuring a grid of colorful tiles, some of which change with fresh content from the Web]. Is it a risk bringing such a different user interface to consumers?

Mr. Ballmer: Well, we've got to look forward. The market's still pretty nascent, but at the end of the day, I think the wall-of-icons [on iPhones and Android devices] is getting pretty complicated for people. That doesn't mean people don't want applications, though I'm not sure that's really the way the average person really wants to work.

Putting the activities that are most important in people's lives and the people that are most important in people's lives front-and-center through these hubs, I think we're going to capture hopefully the imagination of quite a good number of people.

WSJ: Will there be an immediate uptake of Windows Phones?

Mr. Ballmer: I don't make forecasts. It's partly how many we can get made, it's partly how much we can — can not only build a great product, but how does the word of mouth work, how effective is the advertising that we'll do?

WSJ: Do you think Windows phones will evolve into something that becomes a replacement for full-blown Windows on PCs?

Mr. Ballmer: It's a complicated subject. Do I think the world's going to live all on small-screen devices? No. I think people are going to have small-, medium-, and large-screen devices.

Will the technology that powers those be absolutely 100% radically all different? No, I think there will be a lot of shared technology across the devices. You don't want the same user interface, actually, on every one of these devices because they do have different modalities of operation. I think you're happy you've got a full-sized keyboard right now, for example.

I don't think any part of the market stops being healthy. What's the most popular smart device on the planet? It remains the PC. 350 million PCs sold this year, and smartphones might be — what? — a little less than half of that. So smartphones are very important, so are PCs.